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Monday, December 10, 2012

Silvio is back, Mario is out: What lies ahead for Italy?

The past weekend was a particularly eventful one for Italian politics - and we followed it on Twitter @OpenEurope.

After lengthy talks with Italian President Giorgio Napolitano, Mario Monti has announced that he will step down as soon as the budget law for 2013-15 is passed. The announcement caught many off guard in Italy, but the situation had got to a point where Monti really had little choice - since he had de facto lost his majority in both chambers of the Italian parliament after Silvio Berlusconi's party withdrew its support.

What happens next? A timeline

Monti's early resignation paves the way for early elections. The exact date will be announced in the next few weeks, but a reasonable estimate is already possible at this stage.

The budget law is due to be submitted to the plenary of the Italian Senate for approval on 18 December - although the calendar of works may be tweaked to speed up the process. Once Italian senators have given their green light, the bill will go back once again to the lower chamber for the formal final approval.

Therefore, it is fair to assume that Monti could resign and the Italian parliament could be dissolved before Christmas - or immediately after, at the latest.

The next general elections in Italy were originally due in early April - meaning that the latest events have actually brought them only a few weeks forward. However, there are at least two short-term implications for Italy:

With Monti's government leaving office earlier than planned, there will be no time to approve a new electoral law. The one currently in place envisages two different systems for the distribution of seats in the two chambers of the Italian parliament. In short, the existing law guarantees a solid majority in the lower chamber to the party or the coalition that wins the elections, but risks creating an unstable majority (or no clear majority at all) in the Italian Senate. A risk Italy should have avoided running.

The latest events can easily be interpreted by the markets as a signal that Italy is about to go back to the pre-Monti squabbling between political parties, putting the reform agenda at risk. And in fact, Italy's borrowing costs have gone up quite substantially already this morning.

What are the potential implications for the eurozone and the EU?

Italy's eurozone partners and the EU institutions will be watching the upcoming elections very closely, for obvious reasons. It will be very interesting to see which tones will be used by the different parties during the electoral campaign, and how big an issue the eurozone crisis (and Europe at large) will be. This is what makes Berlusconi's comeback particularly relevant at this point in time.

Over the last few months, Il Cavaliere has pulled no punches in his attacks on a "hegemonic" Germany which is imposing a tough austerity cure on the rest of the eurozone. Crucially, he repeatedly argued that the "disastrous" economic policies implemented by Monti's government ought to be overturned to drag Italy out of prolonged recession and make it return to growth.

Berlusconi is well aware that his party is trailing the centre-left Democratic Party by a wide margin in all opinion polls. Given his undoubted abilities as a communicator, he also knows that he may have to insist on a quite populist, anti-austerity (and, potentially, anti-German) rhetoric to try and regain some ground on the road to the next elections.

All the more so if, as Berlusconi himself suggested yesterday, the historic alliance between his party and Lega Nord - which makes no secret of its opposition to the euro and has recently called for a referendum on Italy's membership of the single currency - is going to be restored.

Add Beppe Grillo's Five-Star Movement - another supporter of a euro referendum - to the mix, and we may be looking at an election where, if these three parties perform accordingly to what the latest opinion polls are saying, around 40% of Italians would vote for political forces which are against excessive austerity (all of them) and even against the euro (Lega Nord and the Five-Star Movement).

We will respect the very stringent commitments taken...and we will take them on as our own.

Good news for the European Commission, the ECB and Italy's eurozone partners? In principle yes, but we doubt Nichi Vendola - the leader of left-wing SEL party which is going to back Bersani's candidacy to Palazzo Chigi - agrees with such a statement.

In other words, it looks as if Italy is gearing up for an electoral campaign where the future of the eurozone crisis and austerity will be among the core issues - somewhat similar to what happened during the Greek elections earlier this year. Indeed, there is clearly some way before the Italian debate becomes as poisonous or categorical as the Greek one.

Extremely interesting stuff on the horizon, so keep following us for further updates.

4 comments:

What lies ahead: a bumpy downhill slide; leaving of the Eurozone; and a long drawn out recovery to a mediocre condition. The longer it goes on, the longer the downhill slide, and the more mediocre the end result.Sell your bonds now....

As far as the Euro crisis rescue attempts go imho is mainly interesting in how far countries like especially Italy and Spain become dysfunctional. A sort of large Greece. This will be the trigger for a lot of things.

1. It will become a political disaster to sell rescue attempts. Rescuing Greece has probably burned half the political capital available for all Euro rescues. Completely unlikely that the Northern 'saviours' will be able to continue this process when there are more countries that basically do what they want because the structural measures cannot be sold/implemented/enforced or wharever.

2. Amounts involved. The Greek rescue basically cost more than the original Greek sov. debt. Next to the fact that this is complete and utter mismanagement if the same would happen with Italy and/or Spain you are talking 1 or 2 Trillion resp. per country.These amounts are not even close available in the present rescue mechanisms. Furthermore highly doubtful if the North want to increase these with these sort of amounts involved.

3. This all will give a lot of market pressure. Yields will go through the roof. And everybody unless part of the national suicide pact between local bust banks and governments will run for the exit. And if the ECB will give a possibility that will be used (effectively to move the risk/loss from financial sector to the mainly German taxpayer).

As far as the Euro goes the level of dysfunctionality in relation to the currency and rescue will largely determine how those things will play out.With at the moment hardly enough capacity for a fully functional and high speed restructuring Spain alone. And it looks unlikely that Spain will be that (given the latest news on bail out requests, bad banks, bankrescue, deficits, unemployment and Catalunya) and that it will be alone. With Monti momentarily at least gone and Berlusconi possibly entering the political stage again, most likely we will see Spain followed by Italy going for a rescue (and subsequenly a huge rescuecapacity shortage arising). But likely the newsitems will become more frequent and more sausy. Monti is much too dull.